Why the 2% inflation target? (2023)
Economists’ long‑standing 2% inflation target comes under scrutiny as commenters probe where the number really came from, whether it primarily serves central banks, governments and asset owners, and how well it aligns with people’s lived experience of rising costs. Many argue that modest positive inflation helps avoid deflationary spirals, eases debt burdens and gives policymakers room to maneuver, while critics counter that persistent inflation erodes wages, distorts asset prices, underreports real cost‑of‑living increases through CPI methodology, and functions as a stealth tax on savers and the poor. The exchange widens into questions about monetary vs. fiscal policy, housing and wage stagnation, and whether alternative systems—from tighter money to wealth taxes or even cryptocurrencies—would distribute gains more fairly.
Why a 2% Target (and Not 0%)
- Several argue 2% is a pragmatic buffer: measurement and control are imprecise, so you aim slightly above 0 to avoid deflation.
- Inflation target acts as a coordination / expectations device (a Schelling point): if everyone believes it, wage/price setting is more stable.
- Some note the origin was somewhat ad‑hoc (e.g., NZ’s early “0–1%” remark later nudged to ~2%), then copied globally and retro‑justified.
- Others see it as consciously chosen to allow “stealth” real wage cuts and to erode government debt over time.
Inflation vs. Deflation
- Pro‑inflation side:
- Deflation raises real debt burdens, risks “doom loops” of delayed spending/investment, and is linked to severe downturns.
- Mild inflation eases wage adjustments (freeze instead of nominal cuts), helps debtors (esp. fixed‑rate mortgages), and encourages investment over hoarding.
- Skeptical side:
- Argues moderate deflation driven by productivity can be benign (electronics cited), and that “people will just hoard cash” is overstated.
- Claims deflation would shift power from asset‑owners to savers; sees anti‑deflation rhetoric as serving creditors and elites.
How Inflation Is Measured (CPI, Hedonics, Substitution)
- Heated debate over CPI:
- Critics say basket changes, hedonics, and substitution understate “real” cost of living, especially housing, education, and healthcare.
- Defenders explain methodology (consumer expenditure surveys, changing baskets, regional indices, personal calculators) and stress CPI is a model, not reality, but broadly accurate.
- Boskin‑era changes: one side calls them politically motivated downward tweaks; the other says earlier CPI overstated inflation and that revisions improved accuracy.
Distributional Effects & Inequality
- Many say inflation and the 2% regime disproportionately hurt the poor and lower middle class: wages lag, savings erode, asset prices (especially housing) outrun incomes.
- Others counter that real incomes and material living standards have risen over decades on average, but concede inequality has widened and housing has become less affordable.
- Frequent claim: asset owners and leveraged elites benefit via the Cantillon effect, while cash‑holders and non‑investors lose.
Debt, Housing, and Work
- Inflation seen as:
- Good for debtors with long fixed‑rate loans; bad for renters and those shut out of credit and asset markets.
- One driver of ever‑rising house prices vs wages; zoning and NIMBYism cited as separate but compounding issues.
- Broader structural points: globalization, immigration, women’s labor‑force entry, and tech are proposed as key wage/price drivers, independent of the 2% target.
Central Banks, Politics, and Alternatives
- Some view central banks as highly political, using 2% plus money creation to quietly tax savers and backstop financial markets.
- Others argue the main problem is fiscal (deficits, underfunded social systems) rather than the target itself.
- Alternatives floated include: zero inflation with wealth taxes, full wage indexation (e.g., Belgium), permanent ZIRP with fiscal tools, or even “hard money”/crypto; none have consensus support in the thread.